The Retrade

Brad Feld has a post up about The Retrade. This is when you have a handshake or a signed term sheet on a deal (M&A or Financing) and the person on the other side calls you up a day or two before closing and tells you why they are going to have to change the terms of the deal. Go read Brad’s post, it is a good one.

My view on retrades is that they are part of the way the investment and M&A business gets done. You should not get emotional about them. You should not walk away over them unless you have a better option. You should simply accept them as part of the way the game is played and deal with them as best you can. You can often negotiate a retrade. You won’t get back to where you were before the retrade but you can often do better than what is being suggested.

In a market when retrades are common (private equity or the down cycle of the venture business), you should always negotiate more of a premium than you need or desire in the initial signed term sheet or LOI. That way you are building in a cushion for the expected retrade. If you are playing a game, you need to know how the game is played and act accordingly.

The thing about retrades is it is a signal about the person or institution you are doing business with. Sometimes retrades happen for legitimate reasons. A typical one is the due diligence shines a bright light on a problem that was unkown at the time of the signing of the term sheet or LOI. That is the most common explanation for retrades. But sometimes it is legitimate and sometimes it is not. Understanding all of this and how it reflects on the “retrader” is important. Because the one thing you do want to avoid is getting into business with bad people. Retrading is a potential red flag that the person you are dealing with is not a good person, but it is not definitively so.

As always, I suggest doing references, and as many of them as you can, on people you are thinking about getting into business with. If you hear that the person is a serial retrader, then you know that’s what you are dealing with and you might want to think twice about getting into business with them. If you have heard nothing but good things about the person or firm, then I would take the retrade in stride, deal with it, close and get on with things.